You may hear lauded financial experts talk about the benefits of paying off your loan early, and what they say is right…mostly. However, are there circumstances when paying a loan off early could be more hurtful than helpful?
Let’s take a look.
While paying loans off early can have big benefits like freedom from debt and money saved in interest, there are times that paying a loan off early isn’t to your benefit. Here are three times when it benefits you to keep a loan and put your extra funds somewhere else:
- You waited too long. Maybe paying off your loan early would have been a good idea … years ago. Some loans (your mortgage for example) have you paying the largest chunk of the interest in the early years of the loan. If you’re many years into your mortgage, while you may pay off the loan a little early, you’re not going to see the great financial benefits of paying extra each month.
- You’re not financially prepared. Paying off debt should not come at the expense of larger goals, such as saving for retirement, making investments, or funding college for your kids. Even more important is growing (or replenishing) your emergency savings. Too often we see people pay off debts, only to have an unexpected expense come up soon after and have to take out another loan to cover those expenses.
- You could be penalized. If your loan is subject to prepayment penalties, you’ll be charged a fee if you pay it off early. Not all loans come with prepayment penalties and even if yours does, the penalties vary depending on the loan and the lender. Be sure to check your loan documents to make sure that the loan you want to pay off is not subject to prepayment penalties.
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